What is the Theory of Cost-Push Inflation?

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The theory of cost-push inflation (also called sellers’ or mark-up inflation) became popular after the mid 1950s. It attempts to explain the rise in prices when the economy is not at full employment.

According to this theory, the prices, instead of being pulled up by excess demand, may also be pushed up as a result of rise in the cost of production.

The basis of cost-push theory is that organised groups, both business and labour fix higher prices for their products or services than would prevail in perfectly competitive market.

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Cost-push inflation is characterised by insufficiency of aggregate demand, unemployment of resources and excess capacity.

In nut shell, the cost-push theory of inflation maintains

(a) That the true source of inflation is the increase is cost of production,

(b) That the increase in cost of production is autonomous of the demand conditions,

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(c) That the push forces operate through important cost components, such as, wages, profits or material costs, so that cost push inflation may take the form of wage-push inflation, or profit-push inflation or material-push inflation,

(d) That the increase in cost of production is not absorbed by the producers and is passed to the buyers in the form of higher prices.

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